Committee Allows a Break On Certain Auditing Rules

By STEPHEN LABATON

Published: November 5, 2009

Legislation that its supporters say would provide greater protection to investors sailed through a House committee on Wednesday, but not before the lawmakers added a provision to ease new auditing standards for small and medium-size companies.

The full House, meanwhile, overwhelmingly approved a bill to accelerate restrictions on credit card companies that had been signed into law by President Obama last May. That law was scheduled to take effect in February, but in response to consumer outrage over moves by some banks and credit card companies to raise rates and fees before then, the House moved to make it effective next month.

That move faces significant obstacles in the Senate, however.

By a vote of 37 to 32, the House Financial Services Committee moved to permanently exempt companies worth less than $75 million from the auditing provisions of the Sarbanes-Oxley Act, a change that was promoted by the White House chief of staff, Rahm Emanuel.

The amendment was criticized by senior Democrats, including Representative Barney Frank of Massachusetts, the chairman of the committee. But at a news conference on Tuesday, Mr. Frank defended Mr. Emanuel's involvement, saying he had helped to negotiate a substantial narrowing of the provision.

The companies that would be permanently relieved of auditing requirements under Sarbanes-Oxley have repeatedly won temporary exemptions from the Securities and Exchange Commission. The amendment approved by the committee was sponsored by two New Jersey congressmen, John Adler, a Democrat, and Scott Garrett, a Republican. Supporters said the more stringent auditing provisions were overly burdensome to small companies and that easing them would encourage job growth.

Consumer groups said the provision had no place in a bill that its sponsors say is supposed to help protect investors.

''The supporters of this amendment, including apparently the White House, have suggested that weakening protections against accounting fraud is justified in order to promote job growth,'' said Barbara Roper, director of investor protection at the Consumer Federation of America. ''That is precisely the sort of thinking that landed us in the current mess and precisely the sort of thinking Democrats criticized when they were blaming Republicans for the current financial crisis.''

The bill, part of a broader effort to overhaul the regulatory system in response to the crisis in the financial markets, would provide new powers and increased resources to the Securities and Exchange Commission. The legislation, approved 41 to 28, would give the commission the authority to end mandatory arbitration agreements that investors must sign with their brokers and financial advisers. And it would establish a whistle-blower bounty program for Wall Street employees.

The vote cleared the way for the committee to begin considering a plan by Mr. Frank and the administration to give the government broad new powers to shift the cost of rescues of big financial institutions from taxpayers to other large companies.

The legislation tries to respond to the outcry over taxpayer bailouts of some of the nation's biggest financial companies, including Bear Stearns, Fannie Mae, Freddie Mac, the American International Group, Citigroup and Bank of America.

The measure, directed at institutions whose troubles might pose risks to the financial system, would create a powerful oversight council, led by the Treasury secretary and composed of top regulators, to set policy and tougher regulations for the largest companies and mediate disputes between federal agencies. It would also give the Federal Reserve a lead role in directly supervising many of the largest financial conglomerates.

The legislation accelerating the effective date of the credit card law was approved 331 to 92 after lawmakers criticized companies that had moved to raise rates and fees before the new law takes effect. The law, passed last May, would require banks and card companies to give 45 days' notice before changing interest rates. The law also makes it harder to issue credit cards to students and prevents companies from charging fees to those who exceed their credit limit.

Representative Carolyn Maloney, Democrat of New York and the sponsor of the measure, said it would prevent issuers of credit cards from ''getting in under the wire with a last gasp of unfair practices.''

Industry executives, however, said the move could backfire by prompting companies to restrict the availability of credit at a time when the economy is in a recession.

''This will create significant confusion for consumers and will further restrict access to credit for both consumers and small businesses, all to the detriment of the broader economy,'' said Kenneth J. Clayton, a senior vice president at the American Bankers Association.

PHOTO: Representative Barney Frank, chairman of the House Financial Services Committee. His panel voted to exempt companies worth less than $75 million from Sarbanes-Oxley auditing rules. (PHOTOGRAPH BY STEPHEN CROWLEY/THE NEW YORK TIMES)